Supporting Adult Kids May Cost Parents $227K in Retirement
by Erin El Issa
A majority of parents are paying for at least some of their adult children’s expenses, and it could be costing them up to $227,000 in retirement savings, according to a new NerdWallet analysis.
The survey, which was conducted online by Harris Poll on behalf of NerdWallet, asked more than 2,000 U.S. adults — 656 of whom are parents of children 18 and older — about their spending and saving habits. It found that 80% of parents of adult children are covering, or have covered, at least a portion of their adult children’s expenses after they turned 18.
And while it’s important to help your kids transition to adulthood, doing so shouldn’t cripple your retirement savings.
We found the average of these costs and calculated the potential impact on parents’ retirement savings if they paid their adult children’s bills for one, three or five years. The savings calculation assumes that parents put this money into a retirement savings account, such as a 401(k) or IRA, instead.
Depending on the expenses and the length of time that parents are paying them, the analysis finds that supporting adult children could cost parents hundreds of thousands of dollars by retirement.
- Parents could miss out on almost a quarter-million dollars in retirement savings by paying their adult kids’ expenses: According to NerdWallet analysis, a parent’s retirement savings could be $227,000 higher if they chose to save the money that would otherwise go to their child’s living expenses and tuition.
- Parents paying college costs could be missing out on almost $80,000 in retirement savings: More than a quarter of parents of children 18 and older (28%) are paying or have paid for their adult children’s tuition or student loans. The average parent takes out $21,000 in loans for their child’s college education, but the hit to retirement savings is almost quadruple that amount.
- Most adult children are living with their parents for more than a year after they turn 18: Almost 3 in 5 parents with kids 18 and older (59%) have had adult children living with them for more than a year; over 1 in 5 (23%) have had adult children living with them for more than five years. On average, these parents say the longest period of time they have had their adult children living with them is 4.5 years.
- Parents expect their kids to help them financially during retirement: Almost a quarter of parents saving for retirement (23%) expect their children to provide financial support for them after they retire. Millennial parents are most likely to say this (44% vs. 25% of Generation X parents and 5% of baby boomer parents), despite saving more than parents from other generations.
Adult children are eating up potential retirement savings
Many parents of children 18 and older are paying or have paid for their adult children’s basic living costs, including groceries (56%), health insurance (40%) and rent or housing outside the family home (21%). Some parents are also covering or have covered their adult child’s cell phone bill (39%) and car insurance (34%). But it’s important for parents — especially those who are behind in saving for retirement — to note that those same dollars could significantly grow their nest eggs over time.
More than a quarter of parents of children 18 and older (28%) are paying or have paid for tuition or student loans for their adult child. Considering the average parent borrows $21,000 for their child’s tuition and student loan payoff plans are around 10 years, it’s potentially costing these parents almost $80,000 in retirement savings to send their kid to college. This doesn’t include any money parents saved for their child’s tuition, which if prioritized over retirement could push this savings loss even higher.
On average, a parent covering a child’s living expenses for five years and borrowing money for college tuition is missing out on $227,000 — almost a quarter of a million dollars — in retirement savings. A higher cost of living or supporting multiple adult children could drive that number even higher.
In addition to these living costs, some parents of children 18 and older are paying or have paid for other expenses, such as clothing (32%), entertainment (20%), an allowance (10%) or a car loan (10%).
We didn’t include these expenses in the total hit to retirement savings in our analysis, but any amount a parent gives their adult child that they could otherwise save might be derailing their retirement plans. Suppose a parent gives an adult child an allowance of $200 a month for five years. That $12,000, invested in a retirement account earning 6% interest, would grow to almost $40,000 by the time the parent retires.
What parents should do: Over half of parents of children of any age (57%) say they’re confident that they’re contributing enough to their retirement savings, and if that’s the case for you, helping your children financially may not hurt you. However, if this help comes at the expense of your own retirement savings, it can significantly impact your standard of living later in life.
As parents, we tend to want to do everything we can to help our children succeed. But sometimes we focus on the present at the expense of the future.Andrea Coombes, Investing Expert at NerdWallet
If you aren’t sure whether you’re saving enough, you can get help figuring out how much to save for retirement.
Andrea Coombes, NerdWallet’s investing expert, weighs in: “As parents, we tend to want to do everything we can to help our children succeed. But sometimes we focus on the present at the expense of the future.” Rather than taking money from your own savings and putting your retirement security at risk, Coombes suggests looking for ways to help your children that are good for your finances and theirs.
For example, she says, keeping your kids on the family insurance plan as long as possible might help your child save on health care costs. But ask your children to reimburse you for at least some of those costs, and maybe ramp up the amount they contribute over time. “That’ll help get them ready to pay their own bills down the road, even as it keeps you on track to save for retirement — which is when you’re really going to need that money,” Coombes says.
When it comes to student loans, if you’ve already taken out parent PLUS loans for your child, you can ask them to contribute to the bill. You can also refinance your loans or speed up repayment to reduce interest charges.
If you haven’t yet taken out loans for your child but plan to, it’s a good idea to have your child borrow first. Federal student loans tend to have lower interest rates than parent PLUS loans, and your child will have plenty of time to pay them before retirement. You can still help if it won’t hurt your own savings.
Kids living at home to save money
The majority of parents of children 18 and older (87%) had their adult children living with them for some period of time. On average, these parents say the longest amount of time they have had their adult children living with them is 4.5 years.
What parents should do: “One way to help out with your adult children’s finances is to let them live at home and thus avoid the major monthly cost of rent,” Coombes says. “But letting them live at home doesn’t mean you have to give them a free ride.”
It’s probably better for your long-term finances — and theirs — if you ask them to pay some rent and their share of the bills, like utilities. That way, they can get used to building a monthly budget. “Meanwhile, you can keep your eye on the long-term prize: a happy and secure retirement, one where you don’t need to ask your children for help paying the bills,” Coombes adds.
Parents are looking to their kids for retirement help
Almost a quarter of parents saving for retirement (23%) expect their children to provide them some financial support after they retire. This is the case for more than 2 in 5 millennial parents (44%), even though according to a recent NerdWallet study, millennial parents (ages 18-34) are outpacing Gen X (ages 35-54) and baby boomer (ages 55 and older) parents when it comes to retirement savings.
And they assume they’ll get a lot of help: Around 1 in 6 millennial parents saving for retirement (16%) expect their children to provide financial support for more than 30% of their retirement costs, compared with 4% of Gen X parents.
What parents should do: “Saving for retirement is a real challenge,” Coombes says. “You’re putting money aside for an event that’s decades into the future, and you may have only a vague idea of how much money you need to save.”
A smarter move is to put your own retirement savings plan front and center right now.Andrea Coombes, Investing Expert at NerdWallet
The idea of relying on your children as a financial backup when you’re older might seem appealing, but asking your adult children to help fund your retirement may put their financial security at risk.
“A smarter move is to put your own retirement savings plan front and center right now,” Coombes says. Assuming you’ve paid down credit card debt and have an emergency fund in place, make your retirement savings a top goal. “Tell your adult children what you’re doing,” she adds. “Doing so might encourage them to pitch in on household bills, and might nudge them to think about saving for their own retirement.”
Run your numbers through a retirement calculator to see if you’re on track, and if you’re not, start ramping up your savings rate, a little at a time, as often as possible.
If you choose to help your adult children financially, it’s critical to know the potential costs. If you’re saving the recommended amount for retirement and have additional cash to help them out, that’s great. But think twice before jeopardizing your own retirement to cover your adult kids’ bills.
This survey was conducted online within the United States by Harris Poll on behalf of NerdWallet from Aug. 15-17, 2017, among 2,001 U.S. adults ages 18 and older, among whom 1,112 are parents and 656 are parents of children 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Julianne Rowe, [email protected]
NerdWallet’s proprietary analysis of potential retirement savings losses is based on the average costs of expenses that parents of children 18 and older reported covering in the survey:
- We used Bureau of Labor Statistics data for the costs of a cell phone bill, groceries and rent or housing for an individual under the age of 25
- We used Kaiser Family Foundation data for the cost of health insurance, taking the difference between individual and family coverage and dividing it by two (assuming two children, a figure based on the national average)
- We used car insurance by state data from NerdWallet to find the average cost of car insurance for young drivers
- We found the average amount a parent borrows in student loans for their children’s education in a study by researchers at the University of Southern California and the University of South Carolina and the interest rate of a parent PLUS loan for 2016-2017 at the U.S. Department of Education
The analysis assumes parents begin covering adult child expenses when the parent is 44 — 18 years after age 26, the average age of first-time mothers, according to the Centers for Disease Control and Prevention — and the parent retires at age 67, earning an average annual return of 6% on retirement savings.